Short Selling Advanced Order Placements

Short selling is the act of selling shares of stock you do not own to a broker, then buying back (covering) the shares hopefully at a lower price and keeping the difference which is your profit. To obtain the best price possible price for your shares you need to utilize more advanced order placements then just a standard market order. This article will explain those orders.

Since we are not looking at using a standard market order which simply buys us (or in this article sells short) shares at the best price at that current moment, we will want to utilize limit orders and stop orders to fill our trades. Both order types are designed to have us not be present when the trade is made, can be set to not expire indefinitely, and limit orders can allow you to short stock in post and pre market trading.

Limit Orders for Short Selling

What a limit orders does is it sets a designated price that you want to buy or sell your shares of stock, and the order will only activate if the stock hits that price or better. The expiration date can be the end of the day, any future date, or good until you cancel the order yourself (indefinitely).

In the case of short selling, we want to use a limit order to get us a higher price than the current ask. Why? Because when we short, we are betting the stock will go down, and we only make money if the stock goes down. For example if we short a stock at $10 and cover at $9.50, we make $.50 per share less margin interest and trade comissions. But, if we can short at $10.10 and cover at $9.50, we make $.60 per share, or $.10 per share more. A limit order allows you to say, “I want to short this stock ONLY if you can get my shares short at $xx.xx price or better.”

So, instead of using a market order and just taking the best price the market has available at that second, we can setup a limit order that can expire up to indefinitely that will only short our stock if it its $x.xx price. The nice thing about limit orders as that they can also be used in after-hours and pre-hours trading.

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Stop Orders for Short Selling

A stop order is a two part order that first sets a predetermined trigger price, and once the stock hits that trigger price, a preset order is automatically palced (2nd part). Expiration dates are customizable to your specifications. There are two types, a stop market and a stop limit.

With a stop market order let’s say we have 1,000 shares short on XYZ at $100 a share. The stock is currently at $99.50, and if the stock climbs to $101 we want to take our losses and walk away. With a stop market order setup, the trigger price is $101, and the trigger order is the market order. Thus, if the stock hits $101 at any time during the day, our order automatically will trigger a market order to cover all 1,000 shares at the market price which should be at or very close to $101.

The alternative to a stop market order is a stop limit order. The only difference is that instead of triggering a market order once the trigger price is hit, a pre-set limit order is placed. See above for an explanation of utilizing a limit order with short selling.

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Quick Summary

When you short stock you are betting the stock will gown down in value, not up. Your profit is determined by taking the number of shares shorted, and multiplying that number by the dollar amount the stock fell in value. Short at $100 and cover at $99 and you have a realized profit of $1 per share less interest and trade commissions.

When shorting stock there is a big advantage to using limit orders and stop orders over a traditional market order. These orders allow you the flexibility to not be presence at the time of the order being filled, and more importantly can be setup to expire at any future date.

If you want to short stock in pre or post hours trading you will have to utilize a limit order.

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